instruments). Note that these acquisitions are concentric in that they “revolve around” the core business of hospital beds. With these acquisitions Hill-Rom has taken on a risky but a highly diverse portfolio of medical products.There are two types of diversification: related (concentric) and unrelated (conglomerate). Exhibit6-6illustrates possible related and unrelated diversification strategies for one type of primary health care organization.
Exhibit 6.6Related and Unrelated Diversification by a Primary ProviderRelated diversificationis adding new, similar products/services (businesses) that are outside the organization’s core business. This form of diversification is sometimes called concentric diversificationbecause the organization develops a “circle” of related businesses (products/services) and is illustrated by Hill-Rom’s venture into a more diversified series of medical markets while focusing the diversification effort on a series of similar medical products (e.g. long-term care beds, patient mobility equipment, operating room beds, and so on).The general assumption underlying related diversification is that the organization will be able to obtain some level of synergy (a complementary relationship where the total effect is greater than the sum of its parts) between the production/delivery, marketing, or technology of the core business and the new related product or service. This form of diversification has been characteristic of many firms in the pharmaceutical industry.6For hospitals, the two primary reasons for diversifying are to introduce non-acute care or sub-acute care services that reduce hospital costs, or to offer a wider range of services to large employers and purchasing coalitions through capitated contracts.7The movement of acute care hospitals into skilled nursing care is anexample of related diversification.On the other hand, unrelated diversificationis adding new unrelated products/services (businesses) unlike the organization’s core business. This action creates a “portfolio” of separate products/services. Unrelated diversification, or conglomerate diversification,generally involves semi-autonomous divisions or strategic service units. An example of unrelated diversification would be a hospital diversifying into the operation of a restaurant, parking lot, or medical office
building. In such a case, the new business is unrelated to the provision of health care although it may be complementary (synergistic) to the provision of health services.Research on diversification indicates that financial performance increases as organizations shift from single-business strategies to related diversification, but performance decreases as organizations change from related diversification to unrelated diversification.8Single-business organizations may suffer from limited economies of scope whereas organizations using related diversification can convert underutilized assets and achieve economies of scope by sharing resources and combining activities along the value chain. Unrelated diversification has been